Multilateral Agreement on Investment  Multilateral Agreement on Investment: Potential Effects on State & Local Government Preface and Acknowledgments The purpose of this report is to examine the implications for state sovereignty of whathas been publically proposed for the Multilateral Agreement on Investment (MAI) and torecommend actions for governors. It is hoped that this analysis will also aid the dialoguethat is taking place between the federal government and the states on the MAI, and that ithelps to satisfy requests by the federal government for information from states on lawsthat the MAI may impact.No Western Governors' Association (WGA) staff, WGA contractors, or western state pointsof contact for trade matters hold a security clearance that would allow review ofconfidential documents related to the MAI. As a result, this report was prepared usingpublically available documents and sources only. Leaked information on the MAI has notbeen used or inferred from for purposes of this report. Accordingly, the United Statesgovernment and other MAI negotiating parties may have already addressed or agreed toaddress issues set forth in this paper. Nevertheless, until the MAI is finalized among thenegotiating partners, made public, and adopted by the United States through Congressionalimplementing legislation, the issues raised herein should remain a concern for stategovernments.This report was prepared by Thomas Singer and Paul Orbuch of the WGA, with theassistance of Professor Robert Stumberg, Harrison Institute for Public Law, GeorgetownUniversity Law Center. The staff of the Harrison Institute contributed substantialresearch and analysis of state legislation, constitutional law and international law uponwhich this report is based. Contributors include Institute fellows Matthew Porterfield andGary Peck and the following research assistants and clinical interns: Beth Mantz, JohnDwyer, Jennifer Daehler, Ladd Cahoon, Jennafer Smoker Vallez, Marlene Williams andJonathan Engler. The authors acknowledge with gratitude the work of the Harrison Institute and thehelpful comments on drafts of this report provided by state and federal officials andother individuals. Funding for the WGA International Trade Policy Program is provided by the William andFlora Hewlett Foundation and by the Charles Stewart Mott Foundation. Additional copies ofthe report can be obtained by calling or writing to: Western Governors' Association, 60017th Street, Suite 1705 South Tower, Denver, CO, 80202. Phone: (303) 623-9378; Fax: (303)534-7309. Copyright 1997 by the Western Governors' Association. All rights reserved.Contents PageI. Executive SummaryII. IntroductionA. The Push for Investor Protection III. Proposals for a Multilateral Agreement on InvestmentA. Investor ProtectionB. Exceptions to the Agreement C. Creating Legal Remedies D. Avoiding Conflicts with Other Agreements IV. Potential MAI Effects on State Governments A. Economic Regulation B. Land Use and Environment C. Economic Development D. Enforcement and State Sovereignty V. Addressing State Interests in the MAI A. The MAI Process - How the States Can Be Heard B. Recommended State Actions VI. Conclusion I. Executive SummaryWestern states have had great success in attracting foreign investment and investorsbased in the West own significant investments overseas. The proposed MultilateralAgreement on Investment (MAI), presently being negotiated by the world's most developedcountries, is intended to foster additional investment activity, while at the same timeproviding stability to and leveling the playing field for U.S.-based investors.Along with these potential benefits, however, the MAI may also have the effect ofimpinging on the sovereignty of state governments. The purpose of this paper is to examinethe implications of MAI proposals for state sovereignty and to explore actions thegovernors can take to protect state interests. As explained in this paper, MAI proposalsmay impact law-making powers of state and local government in several areas:Limits on state policies which favor local businesses in the four areasthat the Supreme Court has recognized as permissible: (1) laws where state interestsoutweigh incidental effects on out-of-state commerce, (2) direct state subsidies, (3)state government actions as a market participant rather than a market regulator, and (4)other areas of state action affecting out-of-state commerce which are authorized underexisting federal legislation. Limits on investment incentives for economic development, pollutionprevention, and recycling.Limits on performance requirements and measures that governments use tohold companies accountable for creating jobs or making certain investments if they receivegovernment assistance.Limits on economic, land use, and environmental regulation, if MAIarbitration forums find that those laws are burdensome enough to constitute anexpropriation.Limits on general exceptions and country-specific reservations to the MAIthat differ markedly from NAFTA and the Uruguay Round and that could bringmany more state practices within the scope of the MAI.Enforcement proposals that would enable investors or their homegovernments to seek remedies directly against state laws through international arbitrationor domestic courts and create rights that are not now available to foreign investorsthrough American statutes or case law.Consistent with the approach used by the states on the North American Free TradeAgreement and on the Uruguay Round of the General Agreement on Tariffs and Trade,governors are again positioned to support the MAI in principle while pushing the federalgovernment to take steps to protect state sovereignty in the MAI and in potentialimplementing legislation. Among the measures that the governors should seek for the MAIare:The authority of states to discriminate in favor of state residents asconsistent with the United States Constitution.The ability of states to use investment incentives and performance requirementsto achieve legitimate public purposes.Exceptions and reservations in the MAI consistent with those in NAFTA andthe Uruguay Round. All state measures that might be in conflict with the MAI should bereserved and this reservation should in addition cover future state measures.Definitions of national treatment, most-favored-nation, and expropriationthat do not limit state authority.Implementing legislation from the Congress for the MAI.State-federal consultation procedures and other state protections in theimplementing legislation, such as those involving international disputes and stateimmunity, that are not only consistent with those in Uruguay Round but also arestrengthened.International negotiation of the MAI is scheduled to conclude in May of 1997.Accordingly, it is important for governors to express their views on state sovereigntyprotections to the federal government in short order. Thereafter, the governors should aimto work with the Congress and the Administration to shape MAI implementing legislation tobenefit the states.II. IntroductionA. The Push for Investor Protection1. Growth of foreign investment. While the media reports frequently on thetremendous growth in global trade, it is less attentive to the even more rapid worldwidegrowth in foreign direct investment (FDI). What is FDI? According to the U.S. Departmentof Commerce, "direct investment implies that a person in one country has a lastinginterest in, and a degree of influence over the management of, a business enterprise inanother country."{Endnote 1} This contrasts with passive investment in a company'ssecurities, which is considered portfolio investment. The Commerce Department defines FDIas "ownership or control by a foreign person of 10 percent or more of an enterprise'svoting securities or the equivalent," which is deemed enough to influence managementdecisions.{2}The United States is the leading importer ($561 billion) and exporter ($712 billion) ofFDI. Between 1984 and 1995, the U.S. annual inflow of FDI increased by 202 percent, whilethe U.S. annual outflow increased by 785 percent. The turning point was 1990, after whichinvestment outflow began to exceed the inflow and outward U.S. FDI began to outstripexport growth (see box).{3} Inflows have also been substantial -- $61 billion in 1995 andprojected at around $95 billion for 1996.{4} These figures reflect the growing stake that investors in the United States and othercountries have in foreign operations.{5} In the West, inward FDI runs the gamut frommanufacturing plants to resource-based businesses to high-tech R&D. An indication ofthe magnitude of FDI in the West, and its relative importance to western states, ispresented in the following chart. These numbers, which surely understate today's conditions, represent the success thatwestern states have had in attracting foreign investment. However, they also represent theexposure that states face to challenges by the foreign owners of these investments tostate practices that violate U.S. international agreements affecting FDI.2. OECD negotiations. Spurred by the significant and growing American ownershipstake in foreign enterprise, the U. S. government is a leading proponent of a newinternational agreement to protect investors from discriminatory and distorting governmentpractices and to assure the free flow of capital across international borders. The"Multilateral Agreement on Investment" (MAI) is being proposed to givecross-border investors greater protections than that currently provided by the NorthAmerican Free Trade Agreement (NAFTA) and the Uruguay Round agreements that establishedthe World Trade Organization (WTO). The MAI is being negotiated within the Organization for Economic Cooperation andDevelopment (OECD), a group of the world's leading industrialized economies. TheParis-based OECD, consisting of 29 countries,{6} accounts for more than half of theworld's foreign investment. Fully half of the trade among OECD countries is based onforeign investment in subsidiary companies.{7} The OECD began its MAI work when it created a high-level "Negotiating Group"in May of 1995. This group meets monthly under a mandate to complete a proposal by May,1997 for the OECD Ministerial Council, the OECD's governing body. The United States isrepresented on the Ministerial Council by the State Department's Assistant Secretary forEconomic Affairs, with assistance from the Office of U.S. Trade Representative (USTR).{8} The aim of many of the OECD negotiators of the MAI (hereinafter the MAI negotiators) isto curtail the powers not only of national governments but of subnational (i.e., state andlocal) governments as well, in ways that go beyond NAFTA and the WTO. For example, the MAImay strengthen the NAFTA/WTO national treatment standard with a new "effectstest" to protect foreign investors from disparate state treatment even when there isno intent to discriminate against them. The MAI could also add several mandatoryconstraints on state law-making powers, including limits on economic developmentincentives and performance re-quirements, and a duty to compensate investors for"expropriation," which international arbi-tration panels would have the power todefine. The MAI could also give arbitration panels and domestic courts the power toenforce foreign investor rights against state governments.It is important that the states advance their positions on these proposals beforenegotiations are completed for several reasons. First, international trade and investmentagreements are an ongoing activity of U.S. foreign policy, and it would benefit the statesgenerally to have their interests and the principles of federalism embedded in theapproach of federal negotiators. Second, several important state concerns must beaddressed in the agreement itself, such as general and country-specific reservations thatcan exempt state laws from coverage. Third, after negotiations are completed, it will beextremely difficult for the United States to return to the OECD and seek changes to theMAI at the behest of state or local governments. Finally, under one scenario for MAIapproval, the Administration will present the MAI to Congress as a self-enforcing treaty,requiring a two-thirds vote of the Senate but no implementing legislation. This wouldlikely eliminate any post-negotiation opportunities to address state concerns or toinclude in implementing legislation the types of state sovereignty protections that werefashioned for NAFTA and the WTO. In the next section, proposals for the MAI which couldhave the most significant effects on states are described.III. Proposals for a Multilateral Agreement on InvestmentThe OECD has adopted only general goals for the MAI. A few specific proposals haveachieved a consensus, while others are still being debated within the Negotiating Group.This section provides an overview of MAI goals and proposals. In the next section, we drawupon this background to review the potential effects of the MAI on states. This summarydoes not cover all MAI proposals; it addresses only those of greatest interest to states.Since MAI negotiations are confidential, this summary is based primarily on a May 1995report of five OECD working groups and a November 1996 progress report from the MAInegotiators. In the following analysis, proposals by "negotiators" are much morerecent and should be considered as carrying more weight than proposals from "workinggroups."{9}A. Investor ProtectionGoal 1: The most general goal is to set high standards for the treatment andprotection of investment.{10}Goal 2: The MAI should "go beyond existing commitments" (e.g.,NAFTA and the WTO) to achieve a high standard of protection for investors. The MAI willbroaden obligations to go beyond existing nondiscrimination standards of nationaltreatment and most-favored-nation (MFN) status.1. Scope of protection. The MAI is likely to protect the traditional range ofinvestor rights, including the right to acquire or own any asset, related ownership rightssuch as the ability to operate a business, and the ability to transfer funds and othercapital.{11} In addition, expanded prohibitions on discrimination against foreigninvestors by governments, similar to protections contained in NAFTA and the WTO, areproposed for the MAI. Negotiators are also considering proposals that go beyond moretraditional protections to address the negative effects on foreign investment fromexpropriation, investment incentives, and performance requirements.2. Discrimination. The MAI aims to protect foreign investors from discriminationby expanding upon two time-honored provisions contained in existing trade agreements:National treatment. National treatment requires nations to treat foreigninvestors or investments no less favorably than they treat their own. MAI negotiators areconsidering two ideas for strengthening national treatment that have particularsignificance for states. The first proposal is to look not only at whether the purpose ofa law is to discriminate, but also at whether it has a discriminatory effect, to determineif it provides national treatment to foreign investors.{12} For example, Canada hascomplained that a state tax incentive to promote "microbreweries" is a violationof national treatment, not because the law has an explicit intent to discriminate againstforeign producers, but because its effect is discriminatory since Canadian producers aretoo large to qualify for the benefit.{13} The second proposal would require "full market access" in the form of uniformtreatment of foreign investors within national borders (hereinafter "uniform nationaltreatment").{14} The ability of laws and regulations to vary among states with regardto foreign investors would likely fail to comply with this version of national treatmentunder the argument that it fragments the national market into as many as 50 regulatorysubmarkets. The significant potential impacts of these two proposals are discussed in thenext section.Most-favored nation status (MFN). MFN requires nations to give each otherthe most favorable treatment they give any trading partner. A common state practice thatviolates MFN is the use of reciprocity; that is, laws which require a state to giveforeign investors the most favorable treatment they give domestic investors only ifstate-based firms are treated in that manner in the foreign investor's home country.{15}3. Expropriation. The MAI also aims to protect foreign investors fromexpropriation or "any other measure having similar effect."{16} This covers anygovernment action that would "have the effect of depriving an investor of itsinvestment" including limits on use and disposal, government regulation (even if itdoes not affect title or ownership), and partial takings. The scope of this proposal isintentionally broad in order to "serve as a safeguard against new forms ofexpropriation in the future."{17} An important aspect of this proposal is that itwould apply to foreign investors even if the government measure was non-discriminatory;i.e., if it applied to domestic investors as well. 4. Investment incentives. While an OECD working group opposes government taking,it also opposes government giving when it distorts private market allocation of capital.This includes opposition to the widespread practice of using investment incentives as atool to promote economic development. Opposition goes beyond discrimination that limitsinvestment incentives to domestic firms, to encompass investment incentives of any kindwhich inevitably favor recipients over non-recipients (whether domestic or foreign),promote investment in the jurisdiction providing the incentive, and, in many cases, seekto build the capacity of state-based businesses to expand exports and compete globally.The MAI options under consideration include bans or limits on incentives, use of aneffects test to determine whether there is injury to foreign investors, stronger nationaltreatment rules to avoid discrimination, and greater transparency (i.e., disclosure ofincentives).{18}5. Performance requirements. Even if the MAI does not address investmentincentives, an OECD working group also opposes the practice of linking governmentincentives with performance requirements. Performance requirements commonly dictate thatbeneficiaries of incentives ensure certain levels of local content, employment, orinvestment as a condition of receiving the incentive. This is viewed as distortinginvestment decisions to the benefit of the jurisdiction imposing the requirement. NAFTAset a precedent for the treatment of performance requirements. It prohibits forcingproducers or sellers to use domestic content, transfer new technology, or export a certainlevel of manufactured goods,{19} but it allows performance requirements promoting economicdevelopment or addressing health, safety or environmental standards.{20} MAI proposals maygo further than NAFTA. The MAI may ban not only local sales, content, and productionrequirements, employment requirements, and investment requirements, but it may alsoexclude NAFTA-like exceptions for health, safety, and environmental standards.{21} Forperformance requirements it does not ban, the MAI might impose either a freeze on theirfuture use (a "standstill") or a phase-out over a period of time (a"rollback").{22}B. Exceptions to the Agreement1. General exceptions. General exceptions are broad areas of government practicethat are formally acknowledged not to fall under the rules of the agreement. MAInegotiators have tentatively agreed on only three general exceptions to MAI investorprotections: national security, public order, and international peace and security.{23}This is a major departure from prior trade agreements. WTO general exceptions cover manymore categories, maintaining a historical deference to sovereign power to govern in theseareas. NAFTA applies WTO general exceptions to most of its investor protections{24} andadds several other exceptions to its investment chapter, including exceptions for alllocal government measures,{25} government grant and loan programs,{26} and thecontinuation of existing tax laws.{27} The absence of NAFTA or WTO exceptions in the MAImay create an inference that the MAI covers those areas of sovereign powers. The chart onthe next page lays out the general exceptions contained in NAFTA and the WTO and thoseproposed for the MAI. 2. Country-specific reservations. Country-specific reservations are more narrowareas of government practice negotiated with respect to a member country that are formallyacknowledged not to fall under the rules of the agreement. MAI negotiators seecountry-specific reservations as a political necessity to get an agreement, but theyrecommend a stringent approach to limiting the life of these exceptions.{28} They alsopropose a "roll back" or "sunset" process that removes existing lawsin conflict with the MAI over a specified period of time.{29} U.S. negotiators have statedthat they are prepared to follow the NAFTA precedent and reserve or"grandfather" all existing state laws. Assuming that this position is acceptedby the other OECD countries, grandfathering existing state law would likely still lead toa "standstill" or freeze of state lawmaking authority in the future, and it mayalso entail a "rollback" of nonconforming state laws by some date in thefuture.{30} "Sovereignty" Exceptions to Investor Protection Proposed M A I G A T T / W T O Agmts. N A F T A National security. Public order. International peace and security. Article XXI - General: National security. International peace/security. Article XX - General: Public morals. Human, animal or plant life or health. Importation of gold or silver. Enforcement of laws consistent with GATT. Products of prison labor. National treasures. Exhaustible nat. resources Commodity agreements. Access to domestic industrial material in short supply. Access to products in short supply. Agreement on Subsidies & Countervailing Measures: Adapt facilities to new en-vironmental requirements. Promote investment in disadvantaged regions. Chapter 21 - General: National security. Tax treaties, continuation of existing laws, and new laws for collection of otherwise valid taxes. Balance of payments. Chapter 11 - Investment: Local government measures. Govt. procurement, subsidies, grants, loans, guarantees or insurance. Perform. requiremnts. to: (1) meet health, safety, environ. requirements., or (2) locate prod., provide service, train or employ workers, const. facil. or carry out research/devel. C. Creating Legal RemediesGoal 3: The MAI should be legally binding and containprovisions regarding its enforcement.Goal 4: The MAI should apply to all levels of government.Goal 5: The MAI should encourage conciliation and provide foreffective resolution of disputes, taking account of existing mechanisms.1. Investor-to-government remedies. The MAI could use a"legal" model rather than a "diplomatic" model to enable foreigninvestors to seek enforcement of the agreement directly against governments at either thefederal or state level. Following a legal model, negotiators propose giving investors theright to file claims for damages against governments both in international arbitrationforums and in domestic courts.{31} Arbitration options include existing forums such as theWashington, D.C.-based International Centre for the Settlement of Investment Disputes forinvestor-to-government disputes,{32} and creating WTO-style panels forgovernment-to-government disputes.{33} The leading precedent for this approach is NAFTA,{34} but NAFTA remedies do not apply to any state law in effect at the time of theagreement. 2. Consolidating "class actions." Federal or statepolicies that are inconsistent with the MAI may well affect many investors from variouscountries. The MAI proposal includes a "class action" approach to consolidatingclaims which is also used in NAFTA.{35}3. Subnational enforcement. Private enforcement against state andlocal government laws is a major goal of the MAI.{36} In the WTO setting, if a state lawis found to violate the agreement, it provides only a "diplomatic" remedyagainst the offending national government, such as the reimposition of tariffs by thecomplaining government. In the MAI, negotiators propose giving foreign investors access todomestic courts to enforce remedies against state laws. Also, the Negotiating Group isconsidering several options for dealing with countries like Canada and Australia, which donot have federal supremacy to impose MAI mandates on their provinces. The U.S. federalgovernment does have constitutional supremacy and is prepared to bind states if Congressadopts the MAI.{37}D. Avoiding Conflicts with Other AgreementsGoal 6: The MAI should seek to avoid confusion about overlapwith other agreements, with a view to strengthening rather than undercutting the WTO andavoiding conflict with tax agreements or internationally accepted principles of taxation.Goal 7: The MAI should have jurisdiction over investmentissues that are the subject of regional economic integration agreements and organizationssuch as NAFTA and the European Union.1. The WTO. MAI negotiators may look to avoid confusion with theWTO by integrating the WTO with MAI processes.{38} For example, an OECD working group hasrecommended empowering investors to seek damages under the MAI if a state law violates theprovisions of another investment agreement that overlaps with the MAI.{39} If adopted,this proposal could transform the MAI into an enforcement mechanism that provides expandedlegal remedies for at least certain parts of the WTO.2. Regional trade agreements. An OECD working group anticipatesthat the MAI would supersede the provisions of earlier trade agreements that areinconsistent with it.{40} This could include NAFTA's general sovereignty exceptions aswell as its country-specific reservations, which cover all state laws. These exceptionswere a critical part of the states' position during the NAFTA negotiations.{41}3. Special treatment sectors. The MAI may treat several sectorsspecially or exclude them altogether because of their sensitive nature and historicgovernment involvement or regulation. These include banking,{42} cultural industries (theUnited States opposes exclusion),{43} air travel, and government insurance programs.{44}.4. Taxation. Taxation is perhaps the paramount sovereigntyconcern. The United States and a majority of other OECD nations propose to "carveout" taxation altogether, which would leave most tax matters to specialized taxtreaties.{45} However, several European countries are proponents of applying nationaltreatment and MFN principles to taxation under the MAI.{46} In the past, state governmentuse of unitary tax principals has been attacked by the European Union as a form of doubletaxation that violates national treatment.{47} An OECD working group is seeking to"balance the rights of investors against the responsibilities of tax authorities andto develop clear rules in the MAI to ensure certainty and predictability forboth."{48}The MAI also may address taxation to the extent that tax measurescircumvent other proposals besides national treatment and MFN.{49} For example, taxes canhave the effect of limiting repatriation of profits, heavy tax burdens can be attacked asexpropriation, and tax credits can violate limits on investment incentives. However, sincethere has been no public statement on MAI tax proposals, taxation is not further analyzedbelow. IV. Potential MAI Effects on State GovernmentThis section examines areas of state interest that may be in conflictwith OECD proposals for investor protection under the MAI. The MAI text that is eventuallyadopted may be less ambitious than the proposals on which this analysis is based. However,the OECD clearly anticipates future rounds of MAI negotiations and is laying thegroundwork for investor protection in which the current negotiations are only the firststage. Even if current negotiations stop short of some of the proposals analyzed below,the long-term OECD agenda may well remain in place for future rounds.Our approach is to rely not only on the stated intent of MAInegotiators, but to anticipate how the language of MAI proposals might be interpreted byfuture dispute panels or courts in response to legal claims brought by investors. Thisapproach is necessary because a core purpose of the MAI is to legally empower investors toseek their own remedies and make their own arguments against state laws without mediationby their home governments.Four key areas of state activity are addressed: economic regulation,environment and land use, economic development, and state sovereignty.A. Economic RegulationStates exercise a wide range of regulatory authorities over businessactivity. Regulatory activity that could be impacted by MAI proposals include state rulesregarding ownership, residency, business licenses and banking.1. Ownership or residency requirements. Many states restrict insome way the ownership or sale of real estate, the use of public lands, and businesslicenses based on residency or citizenship.{51} These restrictions could be inconsistentwith proposed MAI antidiscrimination provisions for national treatment. For example:Nebraska,{52} Oklahoma{53} and Indiana{54}limit or prohibit ownership of land by foreign citizens or corporations. Nebraskaand Indiana require foreign citizens and corporations that inherit oracquire land to sell it within five years (if more than 320 acres).{55}Nebraska,{56} Kentucky,{57} Mississippi{58}and Wisconsin{59} limit or prohibit ownership of land by nonresident foreigncitizens.South Dakota,{60} Oklahoma,{61} Colorado,{62}Nebraska,{63} Missouri{64} and Minnesota{65}prohibit foreign citizens and governments from acquiring agricultural land or ranches(some above a minimum acreage).North Dakota,{66} Minnesota,{67} Iowa{68}and Pennsylvania{69} prohibit or limit ownership of agricultural land bynonresident foreign citizens.Arizona,{70} Colorado,{71} Montana,{72}and Oregon{73} restrict sales of state lands to U.S. citizens or those whohave declared their intention to become citizens.Nevada limits the right to file a mining claim to personswho are U.S. citizens (or declare their intent to become citizens).{74}Oregon limits licenses to control water rights to U.S.citizens.{75}Alaska,{76} Hawaii{77} and Georgia{78}limit or prohibit foreign ownership of some public utilities.South Dakota prohibits Canadian citizens residing inCanada from forming a South Dakota corporation.{79}2. Fishing fleet restrictions. State restrictions on commercialfishing could violate proposed MAI standards for national treatment, either because theyexplicitly favor state residents or because they have the effect of excluding new marketentrants to the disadvantage of foreign interests. For example:California has imposed a moratorium on commercial salmonfishing licenses until the fleet size falls below 2,500 vessels.{80}Washington limits the number of fishermen who can makelandings of ocean pink shrimp to those who have "historically and continuously"harvested the shrimp.{81}Alaska,{82} California{83} and Oregon{84}require a significantly higher fee for nonresident commercial licenses than for residentlicenses.Maryland limits leases of submerged lands for cultivatingoysters to state residents, and lessees of submerged oyster beds may not transfer leasesto a non-resident.{85}Massachusetts restricts commercial lobster permits toresident citizens of the state.{86}3. Business licenses. Many states impose state residencyrequirements for certain business licenses. Examples of state laws that might discriminateagainst foreign investors include:California,{87} Hawaii,{88} Idaho,{89}Montana{90} and North Dakota{91} require a local presence forone or more types of business enterprise.Oregon requires water developers (including heavyconstruction, plumbing, well drill-ing, irrigation, water resources, and solid wastemanagement companies) to be state residents or state-based businesses.{92}Montana maintains licensing, fee, and sales reportingrequirements for out-of-state but not in-state wholesalers and retailers of produce.{93}Alaska,{94} North Dakota, {95} Oregon,{96}Nebraska{97} and South Dakota{98} limit gaming licenses tostate residents or require an in-state preference for amusement or gaming concessions andservices. These laws could affect a range of business owners from the corner bar to largehotels and river boat casinos. Texas{99} makes state residence a requirementto own a racetrack where pari-mutual wagering is conducted. North Dakotarequires corporations with an ownership interest in a race horse to have a place ofbusiness within the state.{100}4. Banking regulation. The MAI Negotiating Group has decided toapply the agreement to financial services generally, but negotiators may propose specialsector treatment that limits the ultimate application of the MAI to banking law.{101} Therecent U.S. federal reform of interstate bank branching is likely to level many state lawsthat might have otherwise been in conflict with the MAI. However, the potential forconflict persists in such areas as community reinvestment rules, public deposit programs,and state requirements for the location of bank branches, all of which could be seen asperformance requirements. Examples in this area include:Washington,{102} Iowa,{103} Minnesota{104}and Maine{105} are among states that condition the acquisition of bankingassets on meeting performance requirements for community reinvestment ornet-new-benefits.{106}Arizona,{107} New Mexico,{108} Iowa,{109}Ohio{110} and Pennsylvania{111} are among approx-imately 20states that allocate public deposits and other banking business based on communityreinvestment performance or local presence.{112}B. Land Use and EnvironmentMAI negotiators have not identified environmental measures as aparticular problem for foreign investors. However, they may oppose adoption of the generalexceptions found in the WTO for environmental measures that may be inconsistent with theMAI. This section identifies state environmental measures that might run afoul of MAIproposals.1. Limits on the use of state lands. Many states seek to balanceeconomic development with sound resource management on state lands. They do this byplacing limitations and controls on the sale of public lands and the use of its resources.One of the mechanisms used is to limit beneficial use to state residents. Many of thesemeasures could violate anti-discrimination and MFN protections for investors under theMAI. For example:Alaska{113} and Montana{114} limit permitsfor mineral extraction on state lands to U.S. citizens or corporations and foreignapplicants whose home country offers the same rights to U.S. citizens.Arizona limits the sale of public lands to state residentsor state-based businesses.{115} Arizona also limits the right to apply for aright-of-way over public land or a permit to use public land for grazing, extracting oilor gas,{116} or purchasing timber to U.S. citizens and corporations authorized to conductbusiness in Arizona.{117}Hawaii maintains residency and citizenship requirementsfor agricultural public lands that are sold or leased without a public auction.{118}Utah restricts to U.S. citizens the right to apply for theuse of unappropriated water.{119}Wyoming limits mineral extraction from state lands to U.S.citizens, and limits eligi- bility for state royalty in-kind for refining operations tothose conducted entirely within the state. {120}Oregon{121} and Wyoming{122} give preferencefor leasing state land to residents of the state who occupy adjoining land.Idaho{123} and Oregon{124} prohibit the saleof unprocessed timber to foreign countries. Idaho also restricts 95 percentof timber sales from state lands to parties who do not export logs outside of the statefor further sale or processing. 2. Limits on the development of private land. Land use andenvironmental laws are widely used by states to limit landowners in the ways that theydevelop their property to protect natural resource and environmental values. Landdevelopment is clearly an investment that would fall within the scope of the MAI.{125}Since land use laws do not treat foreign developers differently from domestic ones, theissue is not one of explicit discrimination. Rather, the question is whether a foreigninvestor could challenge these rules on the grounds that they are inconsistent with thefollowing MAI proposals for investor protection:Uniform national treatment: Land use rules vary widelyamong states. If the MAI sets a uniform national treatment standard, investors may be ableto complain that divergent state laws are inconsistent with this proposed MAI protection.Expropriation or regulatory taking: Land owners sometimesargue successfully that land use restrictions so reduce the use or value of their land asto amount to a regulatory taking. MAI proposals may empower international arbitrationpanels to set lesser standards than those used by American courts for determining when theburden of regulation becomes a taking or "expropriation."Performance requirements: Under the MAI, land use rulesmay be seen as performance requirements tied to permits. Common requirements such asmitigation measures and energy or water conservation technologies are possible sources ofconflict.{126}Even if negotiators do not intend to cover land use laws, foreigninvestors could try to use the MAI to challenge them. We have noted above that the WTO hasgeneral exceptions covering environmental measures, while the MAI as proposed does not. Inthe future, an MAI arbitration panel might conclude that this omission is purposeful andthat the MAI should apply to allegedly burdensome land use rules. Examples of state limitsor controls on private land development that may run afoul of the MAI include:Most western states require reclamation of surface-minedareas with requirements that exceed or differ from minimum federal standards.{127} Theseinclude sealing acid-producing materials, covering mined areas with soil that will supportvegetation, extensive planting, and constructing drainage and anti-erosion systems.Washington protects tidal wetlands and coastal areas byauthorizing restrictive zones within local zoning controls.{128} In King County, forexample, local governments regulate alteration of topography, mineral extraction, timberharvest, agricultural expansion, utility projects, road construction, golf courses andmarine facilities.{129}California protects coastal areas by requiring that newdevelopment adjacent to sen-sitive habitat areas be designed to avoid adverse impacts.{130}The coastal zoning law also limits conversion of agricultural land to other purposes,{131}and requires most development to be next to an existing developed area withinfrastructure.{132}Regional - Maryland, Virginia and Pennsylvaniacoordinate their wetlands regulation in order to protect the Chesapeake Bay.{133} Underthis agreement, Maryland protects nontidal wetlands by regulating the destruction of plantlife, alteration of topography, and changes to the drainage or flood retentioncharacteristics of land.{134} Any of these laws can impose substantial design, mitigation, orinfrastructure burdens on developers. These laws may also reduce the value of the land.American courts have upheld the government's power to regulate development to achievevalid public purposes without compensation, but an OECD arbitration panel might interpretMAI investor protections with different results.3. Regulation of oil shipments. Anticipating an 800 percentincrease in oil tanker traffic, Washington is the first state to enact standards that aredesigned to prevent oil spills rather than cope with them after the fact.{135} Aninternational trade association is seeking to preempt this law with several legalarguments that failed in federal district court.{136} If the state prevails on appeal inthis case, other states are considering following Washington's lead.{137}MAI proposals could have led to different results before an MAIarbitration panel. Under an effects test for national treatment, the association couldhave argued that the Washington law has the effect of favoring Washington-based tankercompanies over foreign companies that make fewer trips to local ports. Under uniformnational treatment, they could have argued that the Washington law exceeds the safetystandards of both federal law and several international treaties. Tanker owners might alsohave been able to argue under the MAI that the Washington law imposes performancerequirements by requiring investment in certain equipment, management systems and crewtraining.4. Incentives for investment in pollution prevention and controlequipment. Many states provide tax or grant incentives to stimulate investment inpollution prevention or control equipment. Foreign investors could complain that, whilethese incentives do not explicitly discriminate against foreign investors, they do tend topromote investment in the jurisdiction that provides the incentive and are inconsistentwith several MAI proposals:Limits on incentives and performance requirements:Environmental investment incentives are designed to subsidize specific kinds of investmentwithin the states that offer them. Foreign investors could claim that they areinconsistent with proposed MAI limits on investment incentives. In addition, in order toreceive these incentives, states require an investor to perform in ways that benefit theenvironment. Investors could claim that this is inconsistent with proposed MAI limits onperformance requirements.National treatment - effects test and uniform national treatment: Taxincentives for pollution prevention and control could give a significant advantage tofacilities located within states that offer them versus facilities located outside thosestates. Accordingly, foreign investors could claim that they fail stronger proposednational treatment tests under the MAI.Several states exemplify the range of environmental investmentincentives in use (see box): California provides a 40 percent corporate income taxdeduction for renewable energy or pollution control machinery or property in an economicdevelopment area.{138}Oregon provides a 10 percent corporate income tax credit forinvestment in production technology or processes that reduce air emissions.{139}Washington provides an exemption from its sales and use tax fororiginal acquisition of a pollution control facility.{140}Arizona law creates a public finance corporation that usesbonding authority to promote investment in pollution control technology.{141}Colorado has an incentive program for conversion of vehicles toalternative fuels; it provides rebates, loans, grants and other incentives.{142}5. Incentives for investment in recycled materials markets.Thirty-one states promote investment in facilities for processing recycled materialsthrough a combination of tax benefits, public procurement preferences, and private marketregulation such as recycled content rules. While these policies do not explicitlydiscriminate on the basis of nationality, foreign investors could claim that they areinconsistent with the following proposed MAI investor protections:National treatment - effects test: Rules requiring acertain percentage of recycled content in products create an incentive to locateprocessing facilities within or near the jurisdiction that imposes the mandate, due to thecost of transporting unprocessed material for recycling.{143} Foreign investors couldclaim that the advantage afforded firms within the jurisdiction fails a stronger effectstest proposed for national treatment.National treatment - uniform national treatment:Foreign investors may be able to claim that differing state measures fragment the market,which results in a failure to provide national treatment.Performance requirements: Foreign investors may be able toargue that conditioning a tax benefit on investing in production facilities to changeproduction processes from virgin to recycled materials amounts to an investment-distortingperformance requirement.{144}Thirteen states use private market regulation or tax benefits to promotemarkets for recycled newsprint, glass or plastic.{145} Twenty-nine states use procurementpreferences to do the same.{146}Newsprint market - California,{147} Oregon{148}and Connecticut{149} are leaders among the eight states that mandate aminimum percentage of recycled content in newsprint.Container market - California{150} and Wisconsin{151}are among the states that mandate a minimum percentage of recycled content in glass orplastic containers.California requires recycling equipment to process atleast a specified percentage of material generated within the state of California toreceive tax benefits.{152} Procurement preferences - California, Texas,and Michigan{153} are among states with statutory preferences for thepurchase of materials with recycled or recyclable content. California uses a pricepreference that applies to paper, glass, oil, plastic, solvents, paint and tires.{154}Texas requires agencies to apply 8 percent of their procurement budgets to the purchase ofrecycled materials.{155}A state recycled-content law is a good example of a practice that couldbe argued to violate both trade and investment agreements. It could violate a tradeagreement because it seeks to regulate how a product is made rather than how it performs.The same law could violate an investment agreement because it diverts investment fromwhere it would otherwise flow. Under the MAI, foreign investors may be able to argue thatrecycling incentives are aimed at influencing investment decisions more than at resourceconservation. In any event, state promotion of recycled materials markets is likelyto come within the scope of both investment and trade agreements. MAI language on whichagreement should control in cases of overlap will be important, as will any proposal toprovide remedies under the MAI to foreign investors for interests that are protected byother agreements.C. Economic DevelopmentVirtually every state provides incentives for economic development inthe form of tax benefits, grants and loans, job training programs, and procurementpreferences. A long-running domestic debate continues over whether these incentivesprovide a good return to the taxpayer. Based on the same arguments used in the UnitedStates, an OECD working group opposes development incentives because they distort privateinvestment patterns, provide windfalls to act in ways investors would have acted anyway,seek to enhance individual state exports and global competitiveness, and stimulatecompetition among governments that is costly to taxpayers without producing a net gain innational or global productivity.{156} Many state and local governments, on the other hand, take the view thatif they do not use incentives to compete for investment dollars the investments will goelsewhere. This is particularly the case in rural areas and inner-cities. Unlike NAFTA andthe WTO, the MAI proposals include no exceptions for development incentives targetingeconomically disadvantaged areas.MAI proposals include a number of options, including an outright ban onincentives, limits on the amount or purposes of incentives, a "standstill" onfuture incentives, a "rollback" of existing incentives, and an effects test tostrengthen national treatment of foreign investors when overt discrimination isabsent.{157} These options may be in play, but there is growing sentiment "thatcompanies should be able to continue to benefit from incentives and that the MAI shouldnot interfere with how governments seek to promote investment" apart fromnon-discrimination rules.{158}There are many state programs that fall within the scope of MAIrecommendations to limit development incentives. Examples of the potential conflictsbetween state interests and MAI proposals to limit or eliminate incentives follow:1. Tax incentives. State and local governments currently offerover 600 tax incentives that are designed to influence the location and purpose ofinvestments and enhance the competitiveness of state-based firms.{159} If the MAI bans orlimits incentives, foreign investors may be able to challenge state tax incentivesoutright, or argue that they favor recipients and the offering jurisdiction, like themicrobrewery example used earlier. Other examples include:35 states{160} provide tax incentives for job creation,including Oregon (property tax exemption),{161} Hawaii(exemption from income tax on special revenue bonds),{162} and North Dakota(exemption from business income tax).{163}31 states{164} provide tax incentives for industrialdevelopment, including North Dakota (exemption from property tax),{165} Washington(exemption from sales and use tax),{166} and Texas (exemption fromindustrial equipment value tax).{167}45 states{168} provide tax incentives for raw materialsused in manufacturing, including Washington (exemption from sales tax),{169}California (exemption from sales and use tax){170} and Texas(exemption for nonprofit development corporation that processes raw materials).{171}2. Non-tax incentives. Almost every state also providesinvestment incentives in the form of grants, low interest loans (industrial revenue bonds,direct loans, loan guarantees), equity investments, and in-kind assistance such ascustomized job training. Again, depending upon how the MAI effects incentives, foreigninvestors may be able to argue that state non-tax incentives favor recipients in theoffering jurisdiction and violate the MAI. Examples include:49 states offer subsidized industrial revenue bondfinancing as an investment incentive.{172}44 states offer customized job training as an investmentincentive.{173}23 states make various types of grants for economicdevelopment.{174} For example, Hawaii created an agricultural developmentrevolving fund that can make grants or purchase securities to help state-basedagribusiness companies.{175}18 states provide venture capital.{176} Texas{177}and Colorado{178} are leaders in creating state-chartered corporations thatmake equity investments to leverage additional private-sector investment.3. Enterprise zones. Enterprise zones are geographic areas,recognized by federal, state, and local governments to receive coordinated targeting ofinvestment incentives and deregulation. As noted above, the WTO has a general exceptionfor subsidies that are targeted to disadvantaged regions.{179} No such exception isproposed for the MAI.{180} The following are examples of state enterprise zonelegislation:Texas requires "qualified businesses" to locatewithin an enterprise zone and meet specific performance requirements in order to receiveenterprise zone benefits.{181}California gives priority for giving loans and loanguarantees to small businesses located within an enterprise zone.{182}Oregon provides a property tax exemption for businessesthat locate in an enterprise zone.{183}4. Discriminatory practices in granting incentives. In additionto bans or limitations on investment incentives, the MAI may also protect foreigninvestors against discrimination in the provision of incentives. Several states explicitlylimit certain kinds of development assistance on the basis of residency or citizenship.For example: Montana prohibits small businesses with nonresident alienshareholders from taking investment tax credits.{184}Oklahoma requires applicants for agricultural loans to bestate residents.{185} Oklahoma also requires the incorporators of a businessdevelopment corporation to be state residents.{186}Arizona limits eligibility for economic developmentassistance to residents.{187}5. Economic accountability. A growing number of states haveprovided development incentives only to see their value vanish as beneficiaries move outof state or otherwise fail to fulfill their promises. In response, at least 15 states haveenacted accountability measures that legally bind beneficiaries to perform in variousways, refund the contribution, or suffer penalties. These are called "clawback"policies.{188}  Economic accountability policies could run afoul of MAI proposalsbanning or limiting the incentives with which they are linked. They might also run counterto MAI proposals limiting performance requirements that distort investment to the benefitof the jurisdiction offering the incentive{189} and protecting investors' right totransfer assets or funds, as illustrated by the examples below:{190}Arizona requires businesses to meet performance standardswithin five years of completing facilities with state incentives; the state may recapturethe funds if the business does not meet the standards.{191}Colorado has explicit clawback terms in its customized jobtraining program. Companies must certify how many jobs they will create and how much theywill pay workers.{192}Iowa requires companies that receive tax abatements to payat least 75 percent of the county average wage.{193}NAFTA accommodates such accountability measures through exceptions forperformance requirements to locate production, provide a service, train or employ workers,construct or expand facilities, or carry out research and development within thejurisdiction that provides the incentive.{194} No exceptions have been proposed for theMAI.6. Domestic procurement preferences. State procurement practicesreceive major emphasis in foreign complaints about U.S. barriers to trade, particularly"buy domestic" programs and small business set-asides.{195} These practicescould run afoul of the MAI if they are viewed as discriminating against foreign investorsor creating investment-distorting incentives. There already is a WTO Agreement onGovernment Procurement (AGP) to which 37 governors have agreed to bind their states. Forthis reason, MAI negotiators have stated a preference that "the MAI should notinterfere with the obligations of the Agreement on Government Procurement."{196}Thirteen states have not joined the AGP, including Alaska, NewMexico, and Nevada. Procurement practices in these states may fallunder MAI jurisdiction if state rules create investment distorting discrimination, serveas investment incentives (since preferences often result in above-market prices), or ifthey serve as performance requirements by favoring local content or disadvantagedbidders.{197} Should the MAI overlap with the AGP and govern procurement in the 37AGP-signatory states, these states would be exposed to the MAI's binding legal remediesavailable to foreign investors. And, while the AGP includes the same general exceptions asthe WTO and adds exceptions for the services of handicapped persons, phil-anthropicinstitutions, and prison labor, none of these exceptions are proposed for the MAI.{198}The United States also secured country-specific reservations in the AGP to avoid conflictwith several federal and state pro-curement preference programs. These cover procurementpreferences promoting business development by minorities, women and veterans; develop-mentof distressed areas; and environmental quality.{199} Furthermore, individual states wereallowed to apply the AGP only to as much of their procurement as they desired. Many stateslist their own reservations to the AGP, including Hawaii, Kansas, South Dakota,and Washington.{200} No country-specific reservations have been proposed forthe MAI.D. Enforcement and State Sovereignty1. MAI legal remedies. MAI negotiators propose to give foreigninvestors the right to seek monetary damages for both past and future losses, and to seeklegal rulings on whether domestic laws violate investor protections under the MAI. Foreigninvestors may also have a choice of using international arbitration panels or domesticcourts to seek damages.{201} While international arbitration panels might be friendlierfora for foreign investors, access to domestic courts gives them the ability to seekinjunctions to stop enforcement of offending laws, a power that international arbitratorsdo not have. Under NAFTA, investors can have it both ways. They can prosecute their claimfor damages in an international arbitration forum and then seek "injunctive,declaratory or other extraordinary relief, not involving the payment of damages" indomestic courts.{202}While NAFTA's investment chapter is a precedent for this MAI proposal,NAFTA also sets the precedent of Congressional implementing legislation that blocksinvestor access to domestic courts to enforce the agreement. The NAFTA implementation actprovides that only the United States government may use U.S. courts to enforce NAFTAagainst the states.{203}Congress may again be able to exercise its power to limit use of U.S.courts under the MAI, but only if the MAI is submitted to Congress in the form oflegislation that must pass both houses by majority vote. References to implementinglegislation below are meaningful only if the Administration takes that route to obtainCongressional approval.MAI enforcement proposals will confront U.S. policymakers with a numberof choices if Congress considers implementing legislation:Use of domestic courts. Will investors have a right to usedomestic courts to seek damages or injunctive relief? As in the case of NAFTA, it wouldonly be through implementing legislation that Congress could foreclose enforcement of theMAI in the courts by any party other than the United States government.Controlling law. The implementing legislation for bothNAFTA and the WTO state that if a provision of the agreements conflicts with federal law(which includes the Constitution), then that provision has no effect.{204} In contrast,the MAI proposal takes the approach that domestic law applies only to the extent that itis consistent with the MAI.{205}States as parties. The MAI would apply to government atall levels. Does that mean that foreign investors could bring legal claims directlyagainst state governments? Or would an investor have to sue the United States for a claimagainst state law? Congress could act to block direct legal claims against states even inan international forum, or it could permit states to be named directly and defendthemselves or at least participate in defending themselves. Self-defense. If the United States is the named party,would states be able to defend their laws in an international forum? In the NAFTAimplementing legislation, Congress requires the federal government to consult with statesif their laws are the basis of a legal claim, but states have no right to defendthemselves.{206}Recouping damages. If the United States is the namedparty, would the U.S. federal government be able to withhold federal funds or sue statesto recoup monetary damages that are awarded on the basis of an offending state law? IfCongress were to provide for this, it would exert considerable federal enforcement powerover states. Even without this financial leverage, the federal government would have thesupremacy power to ask U.S. courts to prohibit enforcement of state laws that contravenethe MAI.Enforcement of the MAI against states by the federal government is theultimate remedy, whether it takes the form of a lawsuit seeking preemption of state law orless litigious methods such as the withholding federal funds from noncompliant states.While federal officials may hope to avoid using these methods, they may be compelled to doso if they are obligated to implement the MAI as it has been proposed.2. State sovereign immunity. Enforcement of MAI remediesinvolving legal action by foreign investors against states in federal court, either in anoriginal case or an action to enforce an international arbitration award, raises the issueof state sovereign immunity under the 11th Amendment of the Constitution. The 11thAmendment denies foreign citizens or citizens of another state the option of suingAmerican states in federal court unless the state consents or unless Congress has thepower to waive state immunity.{207} Until very recently, it would have been thought that Congress had theauthority to waive state sovereign immunity for foreign investor lawsuits in federalcourt. However, in the 1996 case of Seminole Tribe of Florida v. Florida, a closelydivided Supreme Court ruled that Congress has the authority to waive state sovereignimmunity only under its 14th Amendment powers, which include the power to protect propertyrights, but not under its general powers to regulate commerce.{208} Specifically, theCourt ruled that the 11th Amendment barred Congress from empowering the Seminole tribe tosue the State of Florida in federal court to enforce federal rights under the IndianGaming Act. This decision opens the question of whether property rights protected underthe 14th Amendment extend to the protections for foreign investors proposed for the MAI,giving Congress the power to waive state sovereign immunity under the MAI. In the Seminole case, the Supreme Court also discussed twoalternative mechanisms that could be used to enforce the MAI. The first is a federallawsuit by the U.S. government seeking preemption of state law. This is the approach usedin the implementing legislation for NAFTA and the WTO.The second approach is a lawsuit by individuals against a stateofficial, rather than the state itself, to ensure that the official's future conductcomplies with federal law.{209} This option provides injunctive relief only, not damagesagainst the state or the state official. For example, by adopting MAI investor protectionsthrough a federal statute, Congress might enable a foreign investor to sue anadministrative official, such as a governor. In that case, the investor could seek a courtorder that requires the official to comply with the terms of the MAI. A third approach would be for Congress to give investors remedies thatwould be en- forceable in state courts if access to federal courts is barred. Of course,these latter two approaches would not be available if Congress bans private legal actionin MAI implementing legislation as was done for NAFTA and the WTO.3. Equal protection. Congressional adoption of MAI implementinglegislation could raise significant legal or policy issues regarding equal protection ofthe laws. Many MAI proposals go beyond matters of discrimination, such as the proposals toban performance requirements, limit incentives, and require compensation for expropriationor other government actions that reduce the value of an investment. Foreign investors willbe able to choose international arbitration panels which are not bound to follow theestablished doctrines of American courts to interpret these protections. As noted above,these panels may give foreign investors property rights or remedies that are superior tothose of domestic investors under U.S. constitutional law.4. Delegation of judicial power. The implementing legislation forboth NAFTA and the WTO say that "No provision of [NAFTA or the WTO], nor theapplication of such agreement to any person or circumstance, that is inconsistent with anylaw of the United States shall have effect."{210} In contrast, MAI negotiators haveasserted that MAI provisions will be the substantive law governing any disputes, withdomestic law relevant only when it is consistent with the MAI.{211}Under these conditions, an international forum would have the power torender awards or write opinions on whether U.S. state governments are violating the MAI.Although this approach is already embodied in other trade agreements, a number of legalscholars predict that it can be successfully challenged as an unconstitutional delegationof judicial power. Their argument is that multinational arbitration delegates judicialpower to a forum outside the federal system, which violates the balance of federal powersand Article III of the Constitution.{212} They also argue that international arbitratorswould "exercise significant authority" under laws of the United States{213}without being appointed by the President and confirmed by the Senate, violating theAppointments Clause of the Constitution.{214}V. Addressing State Interests in the MAIA. The MAI Process - How The States Can Be HeardThere are four key stages in the MAI negotiations:1. Core proposals. Negotiations on core proposals will continueat the OECD through Spring, 1997 when the OECD Ministerial Council is scheduled toconsider a final agreement. As discussed, key core proposals include the expansion ofnational treatment and MFN, disciplines on expropriation, incentives, and performancerequirements, and new remedies for enforcement. 2. General exceptions. General exceptions to the MAI will benegotiated along with core proposals through Spring, 1997. They will create a permanentdeference to sovereign authority within the MAI, including the authority of states tocontinue lawmaking in any areas that are covered. 3. Country-specific reservations. Nego- tiations oncountry-specific reservations are likely to follow general agreement on the MAI text.{215}Country-specific reservations are the USTR's preferred means for protecting statesovereignty interests because they have the least impact on negotiations as a whole.{216} 4. Implementing legislation. If the Administration proposes theMAI as an agreement rather than a treaty, it will require implementing legislation. Thereare a number of important issues that states can address in implementing legislation,including waiver of sovereign immunity, right of states to defend themselves ininternational arbitration, availability of non-monetary remedies, and other safeguardssuch as consultation and notice procedures.{217}B. Recommended State ActionsGovernors and other state officials have the opportunity to influencedecisions at each stage of MAI negotiations. While negotiations are underway, thegovernors can influence and in many cases support U.S. negotiating positions by makingtheir policy preferences known to the federal government. Should the MAI be subject toCongressional implementing legislation, the governors will have an opportunity toinfluence this legislation during Congressional deliberations, as well as any relatedstatements of administrative action crafted by the USTR and other agencies.Recommendations to the governors for advancing state interests include:1. Communicate to federal negotiators both support and concern.The governors can demonstrate leadership by immediately communicating support for the MAIto U.S. policy makers while at the same time expressing concerns about its potentialimpacts on state sovereignty. The governors should adopt the following policies andcommunicate them to the federal government.Governors support in principle an agreement that will encourage foreigninvestment and improve the economy in their states.The MAI should preserve the power of states to discriminate forlegitimate purposes as defined by the U.S. Supreme Court, particularly with respect to (a)rational bases for residency requirements and (b) the sale or use of state land as aresource that the state holds in trust for its residents.Proposals for expansion of the traditional definitions of nationaltreatment, MFN, and expropriation could have significant negative impacts on statemeasures. They should not be expanded in ways that limit state sovereignty.Investment incentives and performance requirements are important toolsof state government in areas ranging from economic development to environmentalprotection. The MAI should not limit a state's ability to use these mechanisms to achievelegitimate public purposes.General exceptions in the MAI should be consistent with those providedin NAFTA and the WTO. Country-specific reservations should follow the NAFTA model thatreserves all current state measures that might conflict with the MAI. Exceptions andreservations should endure over time; that is, there should be no standstills orrollbacks.The MAI should not take precedence over NAFTA or the WTO, and investorsshould not be able to use the MAI to enforce other agreements.The Administration should submit the MAI to Congress as an executiveagreement, not as a treaty, so that implementing legislation is required. Consistent withNAFTA and WTO legislation, implementing legislation should include the followingsovereignty protections: Procedures for consultation with the states by the Administration onmatters of international trade and investment policy should be strengthened. For example,State Points of Contact (SPOC) designated by the Governors should have access tonegotiating documents made available to federal policy advisors. Second, SPOCS should havesecure electronic communications links established with USTR. Consultation with the states and Congress should be required before theAdministration attempts to preempt state law inconsistent with the MAI or sue an offendingstate to recoup monetary damages that have been awarded against it by an internationalarbitration panel.State sovereign immunity should not be waived, and private investorsuits against states or their officials in U.S. courts should be foreclosed. States should be able to directly participate in the defense of theirown measures when they are challenged by investors in international proceedings.2. Communicate MAI policy to Congress. The governors shouldcommunicate these same views to Congressional leaders, particularly with respect to theneed for and details of implementing legislation designed to protect state sovereignty.3. Involve other state organizations. The governors should callon the appropriate state and professional associations to monitor the MAI negotiations anddevelopments in Congress. In conjunctions with the governors, they should continue toadvocate state interests as MAI negotiations and the approval process advance. Inaddition, these groups should report frequently to the governors on the follow through ofthe federal commitments made to the states. V. ConclusionForeign investors consider many of the policies that distort investmentto exist at the state level, where corporations are chartered and real estate and otherassets regulated. The European Union claims that American federalism results in"market fragmentation" which thwarts national treatment.{218} But federalism isby design a bottom-up assembly of democratic institutions with diverse and conflictingoutcomes.The MAI could supplant bottom-up processes for preserving differencesbetween nations, much less between subnational governments. The MAI may be more thanmerely a tougher NAFTA or WTO. Unlike those agreements, the MAI may protect investors bycurtailing both sovereign powers and sovereign immunity.While America's overseas investors may stand to gain from thesetrade-offs and FDI may grow even faster, American state and local officials have much tothink about. The complexity of our federal system, which confounds foreign investors, alsocomplicates the task of assessing the ways in which this system would be impacted by theproposed MAI. MAI proposals and country positions are also subject to change asnegotiations proceed, making ongoing attention necessary. No one can do this job betterthan governors and other state officials, once they know what the MAI portends. Thisreport is intended to help state leaders get started on the MAI, and balance stateinterests with the forces of global economic integration.Endnotes 1. U.S. Department of Commerce, Economics and Statistics Administration,Bureau of Economic Analysis, Foreign Direct Investment in the U.S.: 1992 Benchmark Survey,p. M-3. 2. U.S. Department of Commerce, Foreign Direct Investment in the U.S.:1992 Benchmark Survey, p. M-3.3. OECD International Direct Investment Statistical Yearbook, (1996)tables II, III.4. The Wall Street Journal, Vol. 126 no. 23, February 3, 1997,p.1. 5. U.S. Dept. of Commerce, Survey of Current Business, ForeignDirect Investment in the U.S., Table 1. 6. OECD member nations include Australia, Austria, Belgium, Canada,Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,Italy, Japan, Korea, Luxemburg, Mexico, Netherlands, New Zealand, Norway, Poland,Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. 7. World Bank, World Investment Report (1995); KonstantinosAdamantopoulos and Daniel Price, "Towards a Multi-Lateral Investment Regime: Resultsin the Uruguay Round and Prospects in the OECD," International Banking andFinancial Law (Pearson Professional Ltd., March 1995) 1.8. The lead State Department official is Alan Larsen, AssistantSecretary of State. The lead USTR official is Jeff Lang, Deputy USTR. Inside U.S. Trade(November 1, 1996) 6.9. OECD Secretariat, Main Features of the MAI (November 6, 1996) 1.10. This goal and all subsequent goals are paraphrased from MAIReport 11.11. OECD, Main Features of the MAI 12-15; Working Group C, InvestmentProtection [hereafter Working Group C], in OECD Documents; MAI Report;Working Group D, Dispute Settlement [hereafter Working Group D], in OECD Documents155.12. OECD, Main Features of the MAI 37; Working Group A, in OECDDocuments 118.13. See United States - Measures Affecting Alcoholic and MaltBeverages, GATT Doc. DS23/R, BISD 39S216 (adopted on June 19, 1992). This case isgenerally referred to as "Beer II."14. Working Group A, in OECD Documents 119; see EuropeanCommission, Report on United States Barriers to Trade and Investment - 1994(Brussels, April 1994) 9.15. Working Group A, in OECD Documents 122.16. OECD, Main Features of the MAI 20; Working Group C, in OECDDocuments 138.17. Working Group C, in OECD Documents 138.18. Working Group B, in OECD Documents 131.19. NAFTA Art. 1106.20. NAFTA Arts. 1106.2 and 1106.4.21. OECD, Main Features of the MAI 44.22. Working Group B, New Issues, in OECD Documents 129.23. OECD, Main Features of the MAI 60; Working Group A, in OECDDocuments 120.24. NAFTA Art. 2101.1.25. NAFTA Art. 1108.7 is an Investment Chapter general exception fromnational treatment, MFN and senior management or boards of directors (not from performancerequirements).26. NAFTA Art. 1108.7 is an Investment Chapter general exception fromnational treatment, MFN and senior management or boards of directors (not from performancerequirements).27. NAFTA Art. 2103.4(d) and (e).28. Working Group A, in OECD Documents 117.29. OECD, Main Features of the MAI 65; Working Group A, in OECDDocuments 117-118.30. Statement by Gary Clements, U.S. Department of State, to theAgriculture and Trade Committee, National Conference of State Legislatures, December 12,1996.31. OECD, Main Features of the MAI 84; Working Group D, in OECDDocuments 151-154.32. OECD, Main Features of the MAI 86.33. OECD, Main Features of the MAI 69; Working Group D, in OECDDocuments 151, 154.34. NAFTA Art. 1121.1 and 1121.2; Art. 105; Art. 1116.35. OECD, Main Features of the MAI 92; Working Group D, in OECDDocuments 155; Working Group C, in OECD Documents 136; NAFTA Art. 1126.36. Working Group A, in August 15, 1996 Documents 123.37. United States Federal Government paper, " MultilateralAgreement on Investment" 4 (1996).38. Working Group E, in OECD Documents 163-164. The WTOagreements that overlap the most with MAI proposals include the Agreement on Trade-RelatedInvestment Measures (TRIMs), General Agreement on Trade in Services (GATS), Agreement onSubsidies and Countervailing Measures (SCM), the Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPs), and the Agreement on Government Procurement (AGP).39. Working Group C, in OECD Documents 146-147.40. Working Group E, in OECD Documents 159.41. see Orbuch, Paul and Thomas Singer. 1995. "International Trade,the Environment, and the States: An Evolving State-Federal Relationship". TheJournal of Environment and Development, Vol. 4, no. 2 (Summer).42. OECD, Main Features of the MAI 101.43. Gary G. Yerkey, "OECD Negotiators Hope to Minimize Derogationsin New Investment Accord, International Trade Reporter (Vol. 13, No. 11, March 13, 1996)433; Gary G. Yerkey, "U.S. to Oppose Bid to Exempt 'Culture' from OECD InvestmentAccord," BNA Intl. Business & Finance Daily (May 23, 1995).44. For example, U.S. bilateral investment treaties (BITs) do not applynational treatment principles to air transportation, ocean and coastal shipping, banking,insurance, government grants, government insurance and loan programs, energy and powerproduction, custom house brokers, ownership of real property, ownership and operation ofbroadcast or common carrier radio and television stations, ownership of shares in theCommunications satellite Corporation, common carrier telephone and telegraph services,submarine cable services, use of land and natural resources, mining on the public domain,primary dealership in U.S. government securities, and maritime or maritime-relatedservices. Nor do U.S. BITs apply MFN status to mining on the public domain, maritime ormaritime-related services, primary dealership in U.S. government securities, and ownershipof real property. See, e.g., Annex to the Russian Federation - United States TreatyConcerning the Encouragement and Reciprocal Protection of Investment, 31 I.L.M. 794(1992); Protocol to United States - Argentina Treaty Concerning the ReciprocalEncouragement and Protection of Investment, 31 I.L.M. 124 (1992)45. United States Federal Government paper, " MultilateralAgreement on Investment"4 (1996).46. Working Group C, in OECD Documents 148-149.47. See European Commission, Report on United States Barriers toTrade and Investment - 1994 (Brussels, April 1994); see also Barclays Bank TLC v.Franchise Tax Board of California, 512 U.S. 298, 114 S. Ct. 2268 (1994).48. MAI Negotiating Group, Draft Agenda for September and October 1996(June 2, 1996); OECD, Main Features of the MAI 102. 49. See Robert Couzin, Tax Policy Forum: Taxation and theMultilateral Agreement on Investment, 12 Tax Notes Int'l. 2049, 2051 (1966). 51. See Mark Shapiro, The Dormant Commerce Clause: A Limit onAlien Land Laws, 20 Brook. J. Int'l. L. 217 (1993).52. R.R.S. Neb. 76-406 (1995). The Nebraska Constitution reserves theright to regulate alien "acquisition, enjoyment and descent of property ..." NEConst. Art. I, 25.53. 60 Okl. Stat. 121- 123 (1995); Okl. Const. Art. XXII, 1 (1995). Nordoes Oklahoma allow an alien to transfer land to another alien in order to avoid otheralien land laws. 60 Okl. Stat. 124.54. Ind. Code Ann. 32-1-8-2 (1996).55. Neb. Rev. Stat. 72-234.01-.02, 76-402-403, 76-405 to 407, and 76-410to 415 (1995).56. Nebraska allows a nonresident heir of land to request sale of theland in order to receive the net proceeds of sale. Neb. Rev. Stat Ann. 76-408 and 409(1995).57. Kentucky gives a nonresident alien eight years to sell land, afterwhich the state assumes title to the land. Ky. Rev. Stat. Ann. 381.300 (Banks-Baldwin1996).58. Mississippi allows nonresident aliens to own up to five acres ofresidential land and 320 acres of industrial land. The state assumes title to land that isnot in compliance with the law. Miss. Code. Ann. 89-1-23 (1995).59. Wisconsin limits nonresident aliens to 640 acres of land except tosecure repayment of a debt. Wis. Stat. Ann. 710.02(1) (West 1995)60. S.D. Codified Laws Ann. 43-2A-2 to 43-2A-761. 60 Okl. Stat. 121- 123 (1995); Okl. Const. Art. XXII, 1 (1995)62. Colo. Rev. Stat. 36-1-124 (1990).63. R.R.S. Neb. 76-402, 76-403, 76-405, 76-406 (1995).64. Mo. Rev. Stat. 442.571(1)(West 1995).65. 1996 Minn. A.L.S. 315.66. N.D. Cent. Code 47-10.1-02 (1995).67. Minn. Stat. Ann. 500.221 (West 1966).68. Iowa Code Ann. 567.3(1) (West 1995).69. Pennsylvania limits nonresident aliens to 100 acres of land unlessthe land is inherited or held as security for a loan. A resident alien who moves out ofthe state or a nonresident alien who inherits land must dispose of the land within threeyears. After three years, the state may take title to the land. 68 Pa. Cons. Stat. Ann.41, 43, 44 and 46 (West 1996).70. Ariz. Rev. Stat. Ann. 37-610.02 (1995).71. Colo. Rev. Stat. 36-1-124 (1990).72. Mont. Code. Ann. 77-2-306, 77-2-334.73. Or. Rev. Stat. 273.255 (1995).74. Nev. Rev. Stat. 517.010 (1995).75. Or. Rev. Stat. 543.050 and 543.260 (1995)76. Alaska Stat. 42.20.010 (1995).77. Haw. Rev. Code Ann. 269-17.5 (1995).78. Ga. Code 46-5-141.79. Opinion of Attorney General No. 80-21 (South Dakota).80. Cal. Fish & Game Code 8230(b)(4) (1996).81. Wash. Rev. Code Ann. 75.28.720 (1995).82. Alaska Stat. 16.43.160(b) (1995). 83. Cal. Fish & Game Code 7852(b) and (d) (1996).84. Or. Rev. Stat. 508.285 (1995).85. Md. Code Ann., Nat. Res. 4-11A-09, 4-11A-05.86. Mass. Gen. L. ch. 130, 38.87. Cal. Health & Safety Code 18045.5 (1995) (distributors of mobilehomes, manufactured housing or commercial coaches).88. Haw. Rev. Code Ann. 444-14; (construction companies).89. Idaho Code 61-302 and 61-503 (1995) (utility companies).90. Mont. Code Ann. 69-3-202(4) (1995) (utility companies).91. N.D. Com. Code 10-22-08 (1995) (all foreign corporations).92. Or. Rev. Stat. 541.700 (1995). 93. Mont. Code Ann. 80-3-302, 80-3-314, 80-3-32194. Alaska Stat. 43.35.030 (1995).95. N.D. Admin. Code 99-01-20-03, 05 (1995).96. Or. Rev. Stat. 461.215 (1995).97. Neb. Rev. Stat. 9-614 (1995).98. S.D. Codified Laws Ann. 42-7A-43 and 42-7B-25 (1995).99. Tex. Rev. Civ. Stat. Ann. art. 179e, 6.06(a)(12),(b),(d); Tex.Admin. Code tit. 16, 301.1 et seq. 305.102 (1995).100. N.D. Admin. Code 69.5-01-05-16 (1995).101. OECD, Main Features of the MAI 101.102. Wash. Rev. Code Ann. 30.04.230 (West 1986 Supp.).103. Iowa Code 524.1909 (West 1996).104. Minn. Stat. 48.93 (West Supp. 1987).105. Me. Rev. Stat Ann. tit. 10, 1011 (1987 Supp.).106. Survey by the Center for Policy Alternatives (1995).107. Ariz. Rev. Stat. Ann. 6-327 (1996).108. N.M. Stat. Ann. 58-12-2(e)(f) and 58-15-5 (1996).109. Iowa Code 12C.6A (West 1996).110. Ohio Rev. Code Ann. 1111.03 (Baldwin 1996).111. 7 Pa. Cons. Stat. Ann. 6020.150 (1996).112. Gizette Canegeta and Robert Stumberg, Community BankingIncentives (Center for Policy Alternatives, 1993). This report is based on a survey ofstate treasurers and their operating programs, which are not necessarily created bystatute.113. Alaska Stat. 38.05.045, 38.05.135, 38.05.140, 38.05.185, and38.05.190 (1995).114. Mont. Code Ann. 77-3-305A (1975).115. Ariz. Rev. Stat. Ann. 37-610.02, 37-306 (1995).116. Ariz. Comp. Admin. R. & Regs. 12-5-503, 12-5-515, 12-5-705(B),12-5-801(c), 12-5-1101(1), 12-5-2102; Ariz. Rev. Stat. Ann 37-291(A).117. Ariz. Comp. Admin. R. & Regs. 12-5-1001.118. Haw. Rev. Code Ann. s.171-68 and 171-74 119. Utah Code Ann. 73-3-2(1)(a) (1995).120. Wyo. Stat. 36-3-102(b), 36-6-101(a) - 36-6-101(c) (1995); State ofWyoming board of Land commissioners and Wyoming Farm Loan board rules and Regulationsgoverning Leasing of Sub-Surface Resources, Ch. 6, 5, 13(b) (effective March 1, 1982), Ch.7, 3(c), 7.121. Or. Rev. Stat. 273.825 (1995).122. Wyo. Stat. 36-5-105(a) (1996).123. Idaho Code 58-1004 (1995).124. Or. Const. art. VIII, 7 (1995).125. OECD, Main Features of the MAI 14.126. OECD, Main Features of the MAI 44.127. Surface Mining Control and Reclamation Act, 30 U.S.C.S. 1230 - 1265(1966).128. See generally Rev. Code Wash. 35.63 (Planning Commissions);Department of Ecology, Model Ordinance (1990).129. Seattle Audubon Society and Washington Wetlands Network (WETNET), WetnetCitizen's Report: Local Wetland Protection in Puget Sound (December 1994) 49.130. California Coastal Act, Cal. Public Res. Code, 30240 (1996).131. California Coastal Act, Cal. Public Res. Code, 30241 (1996).132. California Coastal Act, Cal. Public Res. Code, 30250 (1996).133. See Chesapeake Bay Foundation, Wetlands PermittingPrograms in the Chesapeake Bay Area (October 1994), App. C.134. Md. Code Ann., Envir., 5-901 et. seq.135. Wash. Rev. Code Ann. 43.21A.21A.705 (West 1966); see PashaPublications, Energy Report (no. 46, vol. 24; November 25, 1996).136. The International Association of Independent Tanker Owners(Intertanko) v. Lowry, 1996 WL 691968 (W.D. Wash).137. California is reportedly considering preventive oil spilllegislation. Sandi Doughton, "9th Circuit Court Gets Appeal of State's StrictOil-Spill Rules," The News Tribune (January 11, 1997) B3. New York has a billpending. 1997 NY S.B. 144 (Senator Skelos).138. Cal. Rev. & Tax Code 24356.7 (1996). 139. Or. Rev. Stat. 315.311. 140. Wash. Rev. Code Ann. 82.34.050 (West 1996). 141. Az. Rev. Stat. 35-806 (1996). 142. Col. Rev. Stat. Ann. 25-7-106.9 (1996).143. See, e.g., J. Christopher Thomas, The Future: The Impactof Environmental Regulations on Trade 18 Canada-U.S. L.J. 389-90 (1992).144. See United States International Trade Commission, Newsprint(USITC Publication 2551, November 1992); 1992 ITC Lexis 651, *14.145. The 13 states include Arizona, California, Connecticut, Florida,Illinois, Maryland, Michigan, Missouri, North Carolina, Oregon, Texas, West Virginia, andWisconsin. For a current report, see Ramond Communications, State Recycling LawsUpdate, Year-End Edition 9 (1995).146. The 29 states include Arizona, Arkansas, California, Colorado,Connecticut, Florida, Hawaii, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan,Mississippi, Missouri, Nebraska, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island,South Dakota, Tennessee, Texas, Utah, Vermont, Wisconsin and Wyoming. For a currentreport, see Ramond Communications, State Recycling Laws Update, Year-EndEdition (1995).147. Cal. Pub. Res., 42756 and 42760 (1995).148. Or. Rev. Stat. 459A.505.149. Conn. Gen. Stat. 22a-256n. 150. Cal. Pub. Res., 14549 (1995).151. Wis. Stat. 100.297 (1994).152. Cal. Rev. & Tax Code 17052.14.153. Mich. Comp. Laws Ann. 18.1261a.154. Cal. Pub. Cont. 12205 (1995).155. Tex. Govt. Code 2155.448 (1995). Recycled newsprint, plastic, andglass laws appear to be effective in influencing investment decisions. In 1989 there wasonly one Canadian paper mill that could process recycled paper; today there are 23. PaulBagnell, "Recycled Paper Running Short: Pulp and paper makers urge Canadians torecycle more so they can stop importing so much from the U.S.," Financial Post(October 31, 1996). Paul Bagnell, "Recycled Paper Running Short: Pulp and papermakers urge Canadians to recycle more so they can stop importing so much from theU.S.," Financial Post (October 31, 1996). Other Canadian companies haveshifted their capital investment in production into the United States, prompting a companyexecutive to complain that "recycled-content laws have single-handedly changed theeconomics of location of the industry." Geoffrey Elliot, vice-president of corporateaffairs for Noranda Forest, Inc., quoted in BNA, "Countries Can't Use Trade toPromote Environmental Action, Conference Told," BNA International Trade reporter(May 20, 1992). Geoffrey Elliot, vice-president of corporate affairs for Noranda Forest,Inc., quoted in BNA, "Countries Can't Use Trade to Promote Environmental Action,Conference Told," BNA International Trade reporter (May 20, 1992). Canadaofficially cites state-level recycled content laws as a leading trade barrier in the U.S.market. Canadian International Trade Ministry, 1995 Register of United States Barriersto Trade (April 1995); BNA, "U.S. Barriers Still in Place, Says 1995 CanadianRegister" BNA International Trade Reporter (April 5, 1995). This is a goodexample of a practice that could be argued to violate both trade and investmentagreements. A trade agreement could be violated by regulation of product characteristics,while an investment agreement could be violated by the regulation's distorting effects oninvestment patterns. Canadian International Trade Ministry, 1995 Register of UnitedStates Barriers to Trade (April 1995); BNA, "U.S. Barriers Still in Place, Says1995 Canadian Register" BNA International Trade Reporter (April 5, 1995).Similarly, the EU complains that the application of state recycled-content policy to"imported products is not in conformity with GATT rules." European Commission, Reporton United States Barriers to Trade and Investment 57 (1994). European Commission, Reporton United States Barriers to Trade and Investment 57 (1994).156. Working Group B, in OECD Documents 131. For a summary of thedomestic debate on incentives, see Schweke et al., Bidding for Business;Corporation for Enterprise Development, "Making Development Incentives MoreAccountable," in Improving Your Business Climate, (forthcoming, 1997)[hereafter, CfED, Improving Your Business Climate]; and National Council for UrbanEconomic Development, Incentives: A Guide to an Effective and Equitable Policy,(Washington, D.C., 1996) [hereafter, NCUED, Incentives].157. Working Group B, in OECD Documents 131.158. OECD, Main Features of the MAI 55; Anders Ahnlid, TheMultilateral Agreement on Investment: Special Topics (OECD, December 1996,http://www.oecd.org/daf/cmis/ahnlid.htm) 4. Mr. Ahnlid chairs the MAI Expert Group 3.159. KPMG Peat Marwick Business Incentives Survey and Press Release,Fall 1995.160. Schweke et al., Bidding for Business 18.161. Or. Rev. Stat. 285.597, 285.600 and 285.605 (1996). 162. Haw. Rev. Code Ann. 39A-84 (West 1996).163. N.D. Cent. Code 40-57.1-04 (West 1996).164. Schweke et al., Bidding for Business 18.165. N.D. Cent. Code. 40-57.1-04.3 (1995).166. Wash. Rev. Code Ann. 82.08.02565 (1966).167. Tx. Const. Art. 8 1-j (West 1966).168. Schweke, et al., Bidding for Business 18.169. Wash. Rev. Code Ann. 82.04.435 and 82.08.02565 (West 1996).170. Cal. Rev. & Tax Code 6377 (1996).171. Tx. Civ. Stat. Art. 5190.6 (West 1996).172. Schweke et al., Bidding for Business 19 and NationalAssociation of State Development Agencies (NASDA), Directory of Incentives for BusinessInvestment and Development in the United States (Urban Institute Press, 3rd edition,1991) [hereafter, NASDA, Directory of Incentives].173. NASDA, Directory of Incentives. 174. NASDA, Directory of Incentives.175. Haw. Rev. Code Ann. 163D-17 (West 1996).176. NASDA, Directory of Incentives.177. Tex. Const., art. XVI, 70(g) (1988).178. Col. Rev. Stat. Ann. 29-4-709 and 710.6 (1994). 179. GATT 1994 Agreement on Subsidies and Countervailing Measures Art.8.2(b). 180. OECD, Main Features of the MAI 60; see Working GroupB, in OECD Documents 131-133. 181. Tex. Gov. Code 2303.402 (1996).182. Cal. Gov. Code 7079 (1996). 183. Or. Rev. Stat. 285.597, 285.600 and 285.605 (1996).184. Mont. Code Ann. 15-31-123.185. 74 Okl. Stat. Ann. 5063.23 (West 1996).186. 18 Okl. Stat. Ann. 903 (West 1996).187. Ariz. Rev. Stat. 41-1505.07.188. Jeremy Brecher, Countering Corporate Downsizing: A Survey ofProposals to Halt Layoffs and Job Degradation (Washington, D.C.: Preamble, 1996); GregLeroy, No More Candy Store: States and Cities Making Job Subsidies Accountable(Chicago: Federation for Industrial Retention and Renewal, 1989).189. OECD, Main Features of the MAI 44-45; Working Group B, in OECDDocuments 129.190. Working Group C, in OECD Documents 142-143.191. Ariz. Rev. Stat. 41-1505.07(H) (1995).192. Conn. Gen. Stat. Ann. 32-5a and 32-223 (1995).193. Iowa administrative statute 261-22.7(2)(a)-(b).194. NAFTA Art. 1106.4.195. See, e.g., European Commission, Report on United StatesBarriers to Trade and Investment (Brussels 1994) 36-37; Canada, Dept. of ForeignAffairs and International Trade, Register of United States Barriers to Trade(Ottawa 1996) 13; Japan, Subcommittee on Unfair Trade Policies and Measures, IndustrialStructure Council, Report on Unfair Trade Policies (Tokyo 1994) 19. 196. OECD, Main Features of the MAI 51.197. NAFTA Art. 1106.1 and 1106.3.198. AGP Art. XXIII.199. General Notes, United States Appendix to the Agreement onGovernment Procurement, 1; AGP, United States Notes to Annex 2, 2 and 3.200. AGP, Annex 2 reservations for individual states include Hawaii(software developed in the state and construction), Kansas (construction, automobiles andaircraft), Kentucky (construction), Mississippi (services generally), New York (transitcars, buses and related equipment), Oklahoma (construction), South Dakota (beef),Tennessee (construction and services generally), and Washington (fuel, paper products,boats, ships and vessels).201. OECD, Main Features of the MAI 84.202. NAFTA art. 1121.1203. 19 U.S.C. 3312(b) and (c).204. 19 U.S.C. 3312, 3512 (1996).205. OECD, Main Features of the MAI 79.206. 19 U.S.C. 3312(b)(1).207. The 11th Amendment to the U.S. Constitution provides: "TheJudicial power of the United States shall not be construed to extend to any suit in law orequity, commenced or prosecuted against one of the United States by Citizens of anotherState, or by citizens or Subjects of any Foreign State." 208. Seminole Tribe of Florida v. Florida et al., 116 S. Ct. 114,1996 U.S. Lexis 2165, at *36 (decided March 27, 1996) overruling Pennsylvania v.Union Gas Co., 491 U.S. 1, 105 S. Ct. 2273 (1989).209. Seminole Tribe of Florida v. Florida, 1996 U.S. Lexis at2165, at *47; citing Ex parte Young, 209 U.S. 123, 714 S. Ct. 441 (1908).210. 19 U.S.C. 3312(a) (NAFTA); 19 U.S.C. 3512(a) (Uruguay Round ofGATT).211. OECD, Main Features of the MAI 79.212. U.S. Const., Art. II, 1. See Robert P. Deyling, FreeTrade Agreements and the Federal Courts: Emerging Issues, 27 St. Mary's L.J. 353,366-67 (1996); Demetrios G. Metropoulos, Constitutional Dimensions of the NorthAmerican Free Trade Agreement, 27 Cornell Int'l L.J. 141, 159-71 (1994); PatriciaKelmar, Binational Panels of the Canada-United States Free Trade Agreement in Action:The Constitutional Challenge Continues, 27 Geo. Was. J. Int'l L. & Economy. 173,190-95 (1993); Jim C. Chen, Appointments with Disaster: The Unconstitutionality ofBinational Arbitral Review under the United States - Canada Free-Trade Agreement, 49Wash. & Lee L. Rev. 1455, 1463-79 (1992).213. Buckley v. Valeo, 424 U.S. 1, 126 (1976).214. U.S. Const., Art II, 2, cl. 2. See Jim C. Cohen, Appointmentswith Disaster: The Unconstitutionality of Binational Arbitral Review under the UnitedStates - Canada Free-Trade Agreement, 49 Wash. & Lee L.Rev. 1455, 1479-96 (1992);Alan Morrison, Appointments Clause Problems in the Dispute Resolution Provisions of theUnited States-Canada Free Trade Agreement, 49 Wash. & Lee L.Rev. 1299 (1992).215. United States Federal Government paper, " MultilateralAgreement on Investment" 6 (1996). 216. United States Federal Government paper, " MultilateralAgreement on Investment"4 (1996). During NAFTA, months of work by state andfederal agencies resulted in the listing of hundreds of country- and state-specificreservations. In the end, these reservations were so inconsistent that the USTR simplydecided to reserve all existing state laws (as of January 1, 1994). However, thesereservations served merely as a "grandfathering" mechanism to avoid conflictswith existing laws. They did not preserve the right of states to enact new laws in thereserved policy areas. The OECD considers this freezing of future lawmaking, orstandstill, to be a minimum constraint for accepting country-specific exceptions in theMAI. Going further, MAI negotiators have also proposed a rollback of laws protected bycountry-specific exceptions to ensure that these laws are covered by the MAI after acertain period of time. OECD, Main Features of the MAI 64-65; Working Group A, in OECDDocuments 119. 217. As an example of the need for consultation, the EU wants the rightto maintain and alter its internal investment preferences without extending them to allother members of the MAI. The EU's arguments support state interest in retaining diversityin their investment preferences, yet the U.S. federal government opposes the EU position,arguing that it violates national treatment and would hamper the entry of Americaninvestors into European markets (United States Federal Government paper, " MultilateralAgreement on Investment" 3 (1996).Advocacy by WGA and other state organizations significantly strengthenedstate protections in legislation for NAFTA and the WTO. see Orbuch, Paul and ThomasSinger. 1995. "International Trade, the Environment, and the States: An EvolvingState-Federal Relationship". The Journal of Environment and Development, Vol.4, no. 2 (Summer). See Orbuch, Paul and Thomas Singer, "International Trade, theEnvironment, and the States: An Evolving State-Federal Relationship," The Journalof Environment and Development, Vol. 4, no. 2 (Summer 1995). However, it tookconcerted action by governors, attorneys general, tax administrators and legislators topersuade USTR on only a few of the many safeguards that were proposed. The most activegroups included the National Association of Attorneys General (NAAG), the NationalConference of State Legislatures (NCSL), the Multistate Tax Commission (MTC), and theFederation of State Tax Administrators. Correspondence on file from July through November1995. For an analysis of all of the state and local proposals for GATT 1994 implementinglegislation, see Carter Pilcher, Comparative Analysis of State SovereigntyProtections in the Uruguay Round Agreements Act (Harrison Institute for Public Law,Georgetown University Law Center, August 1995). The most active groups included theNational Association of Attorneys General (NAAG), the National Conference of StateLegislatures (NCSL), the Multistate Tax Commission (MTC), and the Federation of State TaxAdministrators. Correspondence on file from July through November 1995. For an analysis ofall of the state and local proposals for GATT 1994 implementing legislation, seeCarter Pilcher, Comparative Analysis of State Sovereignty Protections in the UruguayRound Agreements Act (Harrison Institute for Public Law, Georgetown University LawCenter, August 1995).218. European Commission, Report on United States Barriers to Tradeand Investment - 1994 (Brussels, April 1994) 9. Page last updated 10/10/1999 |
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